In a recent study conducted by The Insurance Information Institute (Triple-I) and Casualty Actuarial Society (CAS), it has been revealed that increased litigation over the past ten years has increased the costs of commercial car insurance. Recently, insurance companies have been burdened by the liability costs of litigation. This increased risk and loss of income are proven to correlate with increasing insurance prices directly. Once again, social inflation has affected this industry. It is essential to understand this topic to better understand what this means for you and the future of insurance companies.
What Is Social Inflation?
“If you ever hear an insurance debate, you will hear social inflation. It is a very complex term and rather difficult to understand. It is an important term too, as it directly impacts the insurers’ claim payouts and how much policymakers are willing to cover under insurance.” Explained Reaves Law Firm Personal Injury Lawyer Henry E. Reaves III.
Social inflation, in simple terms, describes all the factors that cause a rise in insurers’ claim costs and the impact it has on the insurance companies and policies. Social inflation is not a new phenomenon but rather reappears in bouts every couple of years and is affected by various factors.
What Factors Lead To Social Inflation?
A prominent driver of social inflation is general economic inflation. As the cost of medical services, rehabilitation, goods, and services increases, there will be an increase in the price needed to be covered by insurance. In addition, changing laws that put limits on personal injury claims have been noted as a factor. In any cases where the law changes against the favor of insurance companies, an inflationary increase may be expected.
The idea that large corporations should pay heavy sums to victims is relatively common inside and outside the courts since these companies have the financial capabilities to do so. The plaintiff attorneys tend to capitalize on this fact and make emotional appeals to the court, helping them win the case. Juries and jury selection also play a significant role in insurance claims. COVID-19 has only increased global wealth gaps and disparity, bringing an increase in anti-corporation sentiments. Because of this, recent reports indicate that juries are likely to vote in favor of the victim in court, rather than any corporation. Third parties such as hedge funds may also be funding plaintiffs. Despite having no stake in the issue, third parties benefit from funding plaintiffs by receiving a percentage of the victim’s settlement. These factors all play a part in increasing social inflation.
The Commercial Auto Insurance Industry
The commercial transportation industry is one of the most severely affected industries. More frequent lawsuits lead to higher insurance payouts, leading to increased auto insurance costs. The Triple-I/CAS study showed that between 2010 and 2019, there was an increase of 20 billion dollars in claim payouts in commercial auto insurance liability. Experts have also noted recent cases where a trucking firm was not negligible per se, yet still compensated plaintiffs for their damages.
Implications For The Insurance Industry
This rise in social inflation might eventually ripple into other insurance sectors, leading to coverage over fewer things by insurance companies. More dramatically, a liability crisis could occur. In the 1980s, many insurance companies were unable to pay debts because of too many liability claims, causing a financial crisis. With rising inflations, some worry that this could occur once again. Because of this, the insurance industry needs to be more vigilant and should propose new policies to keep social inflation and a possible economy-wide insurance crisis at bay.